The Right Time for a Carbon Tax Is Never

Once the electorate was made to realize that cap-and-trade bills (Lieberman-Warner, Waxman-Markey, etc.) were actually taxes on fossil energy, cap and trade became political poison. So it is surprising that an explicit tax on fossil energy is now being pushed in Washington.

The hope among carbon-tax proponents is that they can sugar-coat the tax and make it palatable to conservatives, or at least to enough conservatives. This proposed confection has two ingredients. First, the carbon tax is to be a revenue-neutral swap for some even more harmful tax. Second, a carbon tax would obviate the need for regulation of carbon dioxide and for subsidies to low-carbon energy.

“Revenue neutral” is supposed to mean that each dollar raised will cut another tax by a dollar. But with neutrality, there is no gravy to spread around to all the special interests—and we are talking about hundreds of billions in gravy every year. So revenue neutrality will never happen.

We should remember the example of Waxman-Markey, which similarly promised to raise hundreds of billions from carbon dioxide. It created a special-interest feeding frenzy that, once the dust settled, would have consumed very nearly 100 percent of the revenue for a decade.

The MIT professors who authored one of the studies purporting to show the benefits of a carbon tax must use a Newspeak version of “revenue neutral” when they say, “All of the carbon tax revenue, after assuring neutrality, is used for tax relief or social programs.” If it were truly a revenue-neutral tax, there wouldn’t be any revenue left “after assuring neutrality.”

An anecdote is illustrative of the problem with revenue neutrality. The first person who sat next to me at the American Enterprise Institute’s program on the carbon tax last week told me her association’s industry has great plans for the carbon-tax revenue. There appeared to be more than 150 people at the event. In all likelihood, many of them represent groups with similarly great plans for the revenue.

Revenue neutrality is out, but what about eliminating overly burdensome regulations? Some proponents of a carbon tax believe the tax properly prices the externalities that vex opponents of fossil fuels and, therefore, eliminates the need for regulation of carbon dioxide. Bolstered by this knowledge of economics, they expect any deal for the tax to include eliminating all or a significant part of these regulations.

That logic may work in PowerPoint-filled rooms at think tanks, but not in the proverbial smoke-filled rooms in Congress. If this logic did carry over, then cap and trade also would have eliminated the need for carbon regulation. Instead of reducing regulations, the cap-and-trade bills added them. For instance, the Waxman-Markey bill went on for nearly 700 pages before it even got to cap and trade.

Just in case there might be some confusion as to whether the left is willing to trade off regulation for a carbon tax, Representative Henry Waxman (D-CA) recently cleared things up: “A carbon tax or a price on carbon would be a strong incentive for the development of new technologies. But because it’s so complicated, I would not support preempting EPA. EPA can assure us that we can actually get the reductions we need.”

David Kreutzer is the senior research fellow in energy economics and climate change at The Heritage Foundation's Center for Data Analysis. In this position, Kreutzer researches how energy and climate change legislation will affect economic activity at the national, local, and industry levels. Read his research.

Join The Discussion

The consumer is lost in this, as usual. A $25 /ton tax on coal will raise electric rates for ALL co
nsumers approximately 20%. So much for revenue neutral. The consumer who can least afford it, will be hurt the worse.

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